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Selling To Tenants

Question: We have been renting a single family house for several years. Our tenants have expressed an interest in purchasing, but we are concerned as to whether we will have to pay a real estate commission to the broker who initially found the tenant for us. The lease has a clause stating that if we sell the house during the term of the lease, or any extensions, we are obligated to pay a realtor's fee of 6 percent. Do we have any choice? We do not believe it is fair to have to pay thousands of dollars under these circumstances.

Answer: Many landlords have found themselves in this situation. Most standard leases prepared by real estate companies contain "boilerplate" language to the effect that if the tenant purchases, during the term of the tenancy or for a period after the tenancy, a commission is owed the original real estate company.

Landlords should read their leases carefully, before they are signed. While the landlord may want to offer a commission to the real estate firm, it is not mandatory. I often recommend this clause be eliminated completely from any standard form lease, thereby giving the owner of the property flexibility in the future.

It may very well be that in the future, the landlord may decide to sell the property. Then, a new listing agreement can be entered into -- either with the original real estate company or with another company of the landlord's choice.

At the very least, real estate commissions are always negotiable. We have all read that a number of years ago, several Real Estate Companies tried to increase their standard fees from 6 to 7 percent. This does not mean that potential home sellers must accept such an increase. The law of supply and demand should prevail in the real estate marketplace.

This is especially true in the case of a tenant who is purchasing the property in which he/she has been living for a number of years. In my opinion, it makes little sense to give a real estate agent 6 or 7 percent of the purchase price, if the tenant purchases during the term of the lease. If such a commission clause is to be included in any lease, certainly the amount of the commission can -- and should -- be negotiated.

It should also be pointed out that tenants in the District of Columbia have an absolute right of first refusal to purchase a single family house. Thus, there seems to be even less reason to pay a commission of any amount under these circumstances.

With respect to your specific question, we first have to look to the language in your lease. The appropriate paragraph reads as follows:

Commission in event of purchase. Should tenant purchase during the original term, or any extension or renewal of this lease, or within three months following termination thereof, agent shall be paid in cash by landlord a commission of 6 percent of the purchase price at time of settlement or conveyance...

First, it should be made clear that the real estate company is only entitled to a commission if your tenant purchases the property. If a third party ends up buying your house, under the terms of this paragraph you are not obligated to pay a commission.

If you renew the lease, a literal and strict interpretation of the language would obligate you to pay the commission if the tenant ultimately decides to purchase.

However, you do have a number of options. First, I believe that this language may not be upheld by the Courts if a legal challenge were brought. The language was drafted by the real estate broker, and probably not explained to you when you were given the lease to sign. Indeed, in many cases, the agent -- and not the landlord -- signs the lease.

Second, you might want to consider advising your tenant one month and one day prior to the expiration of the lease that you do not intend to "renew" the lease, but are prepared to sign a new lease, with different terms and conditions. Under this arrangement, you technically have not "renewed" the lease and may not have to pay the commission. This of course is a cloudy issue. Our courts, however, generally take the position that any ambiguities or uncertainties in a legal document (i.e., the lease) will be interpreted against the person who drafted that document.

Third, you should consider discussing the situation directly with the brokerage firm which found your tenant in the first place. Explain your situation, and try to negotiate a lower commission rate. Many real estate broker firms will probably be willing to reduce the commission.

In the future, however, make sure that the next time you sign a lease, you carefully review all of its terms. You have the absolute right to strike any portions of the document which you feel are objectionable or do not meet your needs.

Many consumers have a "thing" about form legal documents. They believe they are sacred and cannot be changed or modified. That is just not true. It takes two people to reach agreement, and all documents can be negotiated, changed or re-written until everyone is in agreement and the document is signed.

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.